Natural Gas Prices Up 12% In March; Some NGL Energy Plays Undervalued

By Dimitra DeFotis

Reuters

A gas flame in a foreign oilfield.

While land drilling in carbon-rich shale formations has produced an overabundance of dry natural gas in the United States, producers have cut spending budgets and decent winter demand has soaked up some supply.

The U.S. Energy Information Administration is expecting natural gas storage levels at the end the heating season will be “significantly lower” than last year.

The result is a 12% rally in natural gas prices this month, and 18% so far this year. The front-month contract for Henry Hub natural gas is holding steady today at $3.96 per million British thermal units. A year ago, as traders contemplated the prospect of natural gas prices falling below $1 per million Btus, we noted that the futures market predicted a recovery to $4 in 2013. (See that post, “Will Natural Gas Price Sink to $1?“)

Gas liquids are part of the story. Exploration and production companies are finding a strong market for natural gas liquids, which are used in chemicals and other industrial processes. And some stocks with “NGL” exposure have been left behind, according to a note out this morning from Nicholas Pope at Cowen Securities.

Pope says companies with gas liquids production exposure are trading at a multiple of 5.1 times (using 2014 enterprise value to his exploration-specific estimate for earnings before interest, taxes depreciation and amortization (Ebitdax)). Oil-weighted names have a similar valuation at 5.1x. But energy companies with a dry-gas weighting are trading at 8.3x, Pope estimates. Among natural-gas weighted names,

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